Ratio Analysis

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The items appearing in financial statements will be meaningful and useful to the executives; owners; creditors etc… provided they are properly analyzed in such a way that one item is compared with another. Ratio analysis is one of the tools with the help of which analysis of financial statement is done. Ratio analysis helps the calculation of number of accounting ratios with the help of items found in financial statements. It helps for the comparison of the accounting ratio with those of previous years or those of other concerns engaged in similar line of business etc…. CLASSIFICATION OF ACCOUNTING RATIOS

The ratios are classified into:
1. Liquidity ratios
2. Leverage ratios
3. Turnover ratios
4. Profitability ratios

1. Liquidity ratios are also known as short term solvency ratios depicts the liquidity or the short term solvency. It is further classified as follows; a) Current ratio
b) Quick / acid test ratio
c) Absolute liquidity ratio
a) Current ratio: It expresses the relationship between current assets and current liabilities. The ideal current ratio is 2:1. If the actual ratio is 2:1 or more than this, it indicates the liquidity or short term solvency. b) Quick / acid test ratio: Quick ratio establishes the relationship between quick assets and quick liabilities. The standard or ideal quick ratio is 1:1. If the actual quick ratio is more than 1:1 it denotes the concern can pay off its short term liabilities out of its quick realizable assets. c) Absolute liquidity ratio: It is more rigorous ratio to measure the liquidity concern. The ideal absolute ratio is 1:2. 2. Leverage ratios measure the relative interest of the owner and creditors of the concern. It indicates the risk of the creditors as against the owners and long term financial position. It is further classified into: a) Debt equity ratio

b) Debt service coverage/fixed charges cover ratio
c) Capital gearing...
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